07 Sep 2013

The Intellectual Bankruptcy of (Mainstream) Macroeconomics

Economics, Krugman 106 Comments

I borrowed that title from Russ Roberts (but inserted the qualifier “mainstream” since, of coure, I love how the Austrians do “macro” topics like business cycle theory). You may recall that Russ was the inspiration for my recent post where I chortled over (what Russ and I thought was) a clearly botched prediction from Krugman that the “fiscal doomsday machine” (Krugman’s term) of the sequester would probably cost 700,000 jobs.

Now in the comments of my post, a few people pointed out that Russ and I (and Scott Sumner, since he has been having fun with the post-sequester economic statistics too) are too quick to claim victory. In particular, surely Krugman didn’t mean that the absolute level of employment would suddenly fall by 700,000 in one month. Rather, Krugman was saying that over the length of the sequester, total employment would eventually be 700,000 lower than it otherwise would have been. Thus there were issues of a counterfactual, and timing, that we would need to consider, before evaluating Krugman’s prediction. As “Joe” pointed out, if we use the Total Nonfarm Employment seasonally adjusted figures from the BLS, and if we choose our baseline of job growth from November 2012 through February 2013 (just before the sequester kicked in), then the average is 247,000 jobs added per month. In contrast, if we look at March 2013 through July 2013 (the latest point available), then the economy under sequestration added only 173,000 jobs per month. So if that discrepancy holds up, it would only take 10 months for Krugman’s prediction to be vindicated.

I absolutely love this sort of thing, where presumably smart guys (Russ, Scott Sumner, and me) can look at the data and walk away with one interpretation, where other presumably smart guys (“Joe” didn’t make any calculation mistakes) can look at the same data and reach a diametrically opposite conclusion. In fact, this is an overriding theme on both my blog and Russ’ posts at Cafe Hayek: There are so many moving parts in macroeconomics that you can ex post fit the observations to just about any theory you want, and you won’t be “lying.” As I like to put it, believing is seeing. That’s why we’re still arguing about the Obama stimulus package, and indeed about the Great Depression. We can’t turn back the clock and re-run the same experiment, this time (say) staying on the gold standard in the 1930s.

My Point Is to Show the Bankruptcy of the Empirical Approach

I know that some Austrians are going to jump on me in the comments, so let me say upfront:
MY POINT IN DWELLING ON THIS STUFF IS TO SHOW THE BANKRUPTCY OF THE EMPIRICAL APPROACH TO ECONOMICS. So for people who say, “Bob, what are you doing?! You’re conceding everything to Krugman when you play the game on his terms!!” I would just say, we have a difference of opinion on the best way to get outsiders to change their minds. Superficially, it sounds entirely reasonable and scientific to take David Friedman’s approach as he laid it out in our debate last summer. It does indeed sound like the Misesians are being weird and medieval if they insist that we can deduce economic laws in an a priori fashion, and no empirical evidence would shake our convictions. Isn’t it the mark of scientific objectivity and humility, to be willing to make falsifiable predictions based on your “model,” and then change your views accordingly when the facts come in?

So, to try to get someone who thinks this way, to understand why it doesn’t work in economics the way it does in physics or chemistry, I think it is entirely worthwhile to show that Krugman et al. aren’t being nearly as “objective” as they think. The Obama stimulus is the best example, of course, where the Romer/Bernstein predictions were hilariously wrong, but no Keynesian batted on eye: “Huh, I guess the economy was worse than we realized, now it’s really good that we ran up the deficit, timid though the stimulus package was.”

Different Baselines Cast “Doomsday Machine” In Different Light

I’ve already relayed “Joe”‘s analysis above, which showed one way that you could vindicate Krugman’s prediction. OK, but Krugman never specified the relevant baseline. As I pointed out to Joe, he conveniently stopped going back in time at the best possible month, because job growth in October 2012 was only 160,000 (below the average under sequester). Is that why Joe started his baseline in November 2012? Only Joe can know for sure.

Let’s pick a less arbitrary baseline. Suppose we look at the 12 months prior to sequester. In that case, using the same government data set that Joe and I were citing in the previous post (and again, I’m not endorsing government stats, I’m just showing how the Keynesians can be wrong even on their own terms), average monthly job growth is 188,000 (compared to the average post-sequester of 173,000). So, if the prior year is the relevant baseline, then Krugman will eventually be right (assuming current trends continued) in 47 months, i.e. in almost four years. Is that what he was trying to say? We’ll come back to that question shortly.

What if we go back two years prior to sequester? In that case, the relevant baseline is average job growth of 163,000/month. Oops, that’s lower than average growth under the sequester, so clearly we can’t go back that far in constructing our baseline.

Finally, my personal favorite, what if we look at average job growth from September 2009–you know, the month after Krugman said that Big Government had saved the economy–until February 2013, when Krugman told us to brace for the fiscal doomsday machine? In that baseline, average job growth during the entire recovery (up to the sequester) was 123,000 jobs per month, a full 50,000 jobs per month less than the growth we’ve seen since the sequester.

Here’s an even more fun fact: In the five months after Krugman declared that Big Government had spared the economy from another Great Depression, the economy lost an average of 131,000 jobs per month. This is in contrast to the average monthly gain of 173,000 jobs, in the five months after Krugman declared that “one of the worst policy ideas in our nation’s history” kicked in.

To be clear, there is no outright contradiction in any of the above. But notice how much Krugman is relying on his Keynesian models, with their counterfactual projections of an alternate universe that we never get to observe, when he so confidently tells us that IS/LM has soared through this crisis with flying colors. A naive examination of the raw data would show that the economy was awful when the stimulus kicked in, and isn’t so bad after the sequester kicked in. The only reason it’s “obvious” to Krugman that the stimulus helped, and the sequester hurt, is that he is using his own Keynesian model to tell him what the world would have been like had there been no stimulus, and no sequester. Fine, but you can’t then use these observations to vindicate the Keynesian model! The model looks vindicated, only if you already thought it was true at the outset. This is why Austrians in the Misesian tradition think economists are fooling themselves when they try to copy the methods of the physicists.

And the Grand Finale: The Macroeconomic Advisers Analysis That Krugman Endorsed Was Totally Wrong

I’ve saved the best for last. All of the above could understandably be construed as quibbling by a Krugman fan. Ah, but what if we click Krugman’s link and actually look at the analysis that generated the “700,000 jobs” figure? Then we’ll see the exact context of that prediction, and realize that it has been repudiated by observations–at least in the same way that the Romer/Bernstein report was totally repudiated.

The Macroeconomic Advisers report first constructs a baseline projection of GDP growth without the sequester, than overlays it with their projections of how GDP growth will be reduced if the sequester happens. This forms the basis of their projections of slower job growth: lower government spending ==> lower output growth ==> fewer workers needed to create that output.

So, if you flip to the tables at the end of the report, you’ll see that its baseline forecast of GDP growth in the second quarter of 2013 was 2.4 percent. But, if the sequester kicks in, in this “Alternative Scenario” they were projecting GDP growth in 2q2013 of only 1.1 percent. Okay, you can see that the sequester was modeled to have a humongous impact on the economy then, in the second quarter of 2013–a reduction of growth of 1.3 percentage points, almost cutting the baseline growth forecast inby more than half.

Now, leaving the world of the Macroeconomic Advisers Keynesian model, what actually happened in the real world? Well, according to the BEA, the best estimate right now of 2q2013 GDP growth is 2.5 percent.

Does everyone see the absolute deliciousness of this? The actual GDP growth in 2q2013 was higher with the sequester than the Macroeconomic Adviser report said it would be without sequester. It is thus the mirror image of the Romer/Bernstein projection of the stimulus package’s impact on unemployment.

Conclusion

Of course, we can adopt the same trick that the Keynesians used back in 2009. We can now say, “Phew, the economy was better than we realized back in February 2013, and so the awful sequester is not causing as much misery as we had feared. Still, we have slower GDP growth, and less job creation, because of the sequester. It’s still a dumb policy, we just got lucky.”

But at some point, maybe the Keynesians should consider that having government officials spend money, isn’t the path to recovery? Maybe that’s why these “baseline forecasts” have to keep shifting around, in such a way as to justify the Keynesians predictions ex post?

NOTE: If you look at the projections of first quarter GDP growth, then things are better for the Macroeconomic Advisers analysis. But surely a better test of their model is to look at 2q2013, which is all sequester.

106 Responses to “The Intellectual Bankruptcy of (Mainstream) Macroeconomics”

  1. joemac says:

    This is a wonderful post.

    But what is the alternative?

    • Bob Murphy says:

      Q: How’s your wife?
      A: Compared to what?

      • joemac says:

        My point is that we cannot avoid trying to figure out macroeconomic problems. We need an answer. Not trying to find an answer is not an option.

        So what do we do?

        • guest says:

          There’s the rub: There are no macroeconomic problems because only individuals can have economic problems.

          Economics begins and ends with the individuals’ pursuit of subjective ends:

          The Birth of the Austrian School | Josep T. Salerno
          [WWW]http://www.youtube.com/watch?v=dZRZKX5zAD4

        • Bob Murphy says:

          Heh that’s funny, I really thought you were just making a joke!

        • Major_Freedom says:

          Not doing empiricism is doing something, in the sense that what is done in its place, whatever it is, whoever does it, that is the something.

        • mtngoat says:

          It depends on what you’re considering a problem, and what you want an ‘answer’ to look like, doesn’t it?

    • Bob Roddis says:

      But what is the alternative?

      For starters, learn how the world actually works.

      http://www.flickr.com/photos/bob_roddis/9646722001/

      And admitting that you’ve never been able to find that elusive market failure that requires a Keynesian “cure”.

    • Sam Grove says:

      joemac
      The answer is to stop wasting resources on non-productive endeavors, that is, reduce government spending.

  2. JimPM says:

    Slowclap.gif

  3. Lord Keynes says:

    “so let me say upfront: MY POINT IN DWELLING ON THIS STUFF IS TO SHOW THE BANKRUPTCY OF THE EMPIRICAL APPROACH TO ECONOMICS. “

    The consequences of such a statement are intriguing. Why did you make an inflation bet, presumably in the hope that, if you were right, you would receive empirical support for your economic theories?

    We must also wonder why you ever bothered writing posts like this, where you happily cited the now debunked Reinhart-Rogoff findings, in an attempt to “empirically” refute the case for government stimulus:

    “The Empirical Case against Government Stimulus”
    Mises Daily: Monday, September 20, 2010
    http://mises.org/daily/4648

    • Dan says:

      Have you never heard of beating your opponents at their own game?

    • Bharat says:

      Murphy: I want to show the bankruptcy of the empirical approach to economics. I like to do this by pointing out that anyone can claim empirical data supports their conclusion.
      LK: But you’ve made posts before showing how you can use empirical data to support one conclusion!

      Woahh there LK, hurting me there with your brilliance.

    • Cosmo Kramer says:

      The R&R findings weren’t “debunked”. The only thing “debunked” was the general threshold they came up with. That doesn’t mean there isn’t a general threshold.

      R&R even specifically noted that each country’s debt tolerance is unique. The main point remains completely intact.

    • Major_Freedom says:

      “Why did you make an inflation bet, presumably in the hope that, if you were right, you would receive empirical support for your economic theories?”

      Presumably? You just added that and ascribed it to Murphy because you want to reveal a non-existent inconsistency in order to make his argument seem weaker than it is. That’s ad hominem tu quoque.

      • Lord Keynes says:

        So Murphy made an inflation bet thinking that if he was right it would not in any sense prove or support his Austrian theories?

        Fascinating. I’d like to see Murphy say that if he really believes it.

        • Bharat says:

          Even if Murphy did so in order to receive empirical support for his economic theory, this is perfectly consistent with a statement that anyone can use empiricism to support their theory. The only way your criticism makes any sense if if Murphy isn’t anyone.

          (I am being overly simplistic by using the word “anyone”; Murphy himself says something about “smart guys” so presumably there is some threshold, just not something he considers an adequate threshold for science)

          One can apply empiricism to their theories even if they do not think it is the properly scientific method for economics. One can do it for purely intuitive support. For example, when arguing for the existence of God, I like to explain the fact that ants lack reasoning capabilities that humans have. There are some things that humans can comprehend that ants simply cannot by their very nature. As such, it’s intuitive that there are such things that humans cannot understand about the world around them. This isn’t necessarily an argument by itself, and I certainly don’t think it is. This doesn’t mean I can’t state it at all. Likewise, one can appeal to the “evidence” to back up economic science even if one doesn’t consider the “evidence” itself to be an integral part of economic science.

        • Anonymous says:

          “So Murphy made an inflation bet thinking that if he was right it would not in any sense prove or support his Austrian theories?”

          Of course! He made the bet so as to make money, not to prove to the world that the validity of Austrianism is empirically grounded.

          If you have read Murphy over the last decade or so, you would know that this post on the intellectual bankruptcy of mainstream macroeconomics, isn’t just some new revelation.

        • Major_Freedom says:

          Of course! He made the bet so as to make money, not prove to the world that the validity of Austrianism is empirically grounded.

          If you have read Murphy over the last decade or so, you would know that this post on the intellectual bankruptcy of mainstream macroeconomics isn’t some new revelation.

  4. Ken P says:

    Good post! On the subject of stimulus effect. Has anyone ever considered the issue of “sticky hiring”?

    I’ve been in corporate America for several decades and what I’ve observed is that hiring seems to be almost completely disconnected from demand. It’s almost guaranteed that some sort of hiring freeze will be put into effect. Even without a freeze. Even without a freeze, companies are reluctant to hire during a recession, even in the face of double digit sales growth. There is also a tendency to take advantage of low interest rates to automate, because workforce reduction is smiled upon during a recession. In a lot of industries, capacity is pretty flexible with regard to labor. While some departments, packaging for example, are more demand-sensitive, most departments -even departments like warehouse/shipping- are pretty flexible in the ability to meet increased demand. My point is that I would expect the stimulus during a recession to largely show up as increased profits.

    • Ken P says:

      Oops, I left out an important phrase. It should read “…that hiring during a recession is almost completely disconnected…”

    • Yancey Ward says:

      This!!!

      And, empirically, your last sentence has more support than any macroeconomic theory being used today.

  5. thinkingotherthings says:

    Bob,

    MY POINT IN DWELLING ON THIS STUFF IS TO SHOW THE BANKRUPTCY OF THE EMPIRICAL APPROACH TO ECONOMICS.

    So do you believe that data is entirely useless in assessing the validity of economic theories? I don’t bring this up to vindicate any of Krugman’s shenanigans (and I thoroughly enjoyed this post), but I think the mere fact that empirical methods can be abused is not reason to abandon them.

    It does indeed sound like the Misesians are being weird and medieval if they insist that we can deduce economic laws in an a priori fashion, and no empirical evidence would shake our convictions.

    I think there is a danger of being overly confident in the internal consistency of a priori logic to the point of neglecting other considerations. Of course all economic theories are couched in ceteris paribus qualifications, but when this condition is violated owing not to random shocks but because a moving part within the model causes something outside the scope of the model to change, then the theory needs to account for that change or be considered faulty (or at least incomplete).

    For example, based on ABCT, many Austrians advocate a 0% money supply growth rate (or whatever the growth rate would naturally be under a gold standard) to avoid distorting economic calculation in a way that generates boom-bust cycles. While ABCT is internally consistent, it ignores the issue of asymmetric nominal price rigidities. If some combination of cognitive biases, political pressuring, and transaction costs make it impossible to cut nominal wages in order to keep real wages from rising too much when productivity increases in other sectors, then without monetary expansion we would expect some degree of unemployment and inhibited growth (a la a different internally consistent theory).

    So when it comes to evaluating a policy proposal such as an X% inflation (or NGDP) target, the magnitudes of these impacts (economic calculation distortion vs nominal price rigidity distortion) need to be weighed against each other, and the question of which effect would be more severe cannot be answered a priori (although if this has been addressed in a purely theoretical framework, please let me know).

    More generally, the macroeconomy has so many moving parts that I’m reluctant to endorse policy recommendations based on any particular theory with 100% confidence. Even if you can logically deduce a conclusion from a premise, you may be neglecting peripheral effects that are not orthogonal shocks but rather also follow logically from the same premise. This is why I think empirical methods are useful – because a priori logical deductions may be either incomplete or lead to multiple predicted effects with different signs, from which the *net* effect cannot be deduced a priori.

    And yes, while the fact that the economy has many moving parts means that no theory can be disproved by data, it is also the case that the data does not fit all theories equally well. I’m a fan of the Bayesian approach. I update my belief in the correctness of a particular theory based on the data (P(H|D)) by factoring in both how likely I think the theory is to be true on the face of it given its internal logic and interplay with other macroeconomic variables as best I can account for (P(H)), and also how well the observed data fits the theory (P(D|H)). Even though economic data is noisy, insofar as we don’t have 100% confidence in out ability to trace out all net impacts of macroeconomic theories, data analysis still has a useful role to play.

    • Major_Freedom says:

      “So do you believe that data is entirely useless in assessing the validity of economic theories?”

      If Murphy’s point that any non-historical economics theory, including theories that contradict each other, can be “proven right” using empirical data, then does he have to also spell out how “useful” it is or is not to you? You can draw your own conclusions.

      “I think there is a danger of being overly confident in the internal consistency of a priori logic to the point of neglecting other considerations. Of course all economic theories are couched in ceteris paribus qualifications, but when this condition is violated owing not to random shocks but because a moving part within the model causes something outside the scope of the model to change, then the theory needs to account for that change or be considered faulty (or at least incomplete).”

      Then poof goes the certainty of the internal consistency of the empiricist epistemology itself.

  6. Daniel Kuehn says:

    re: “The only reason it’s “obvious” to Krugman that the stimulus helped, and the sequester hurt, is that he is using his own Keynesian model to tell him what the world would have been like had there been no stimulus, and no sequester.”

    This is very misleading Bob. These employment estimates come from prior multiplier estimates. It’s not just that you believe a theory and then make a claim – we actually have methods to look at counterfactuals. Not as much data as we’d like to apply those methods, but we are certainly not doing what you’re claiming is being done here.

    There’s also more going on in the economy than just job growth – with interest rates, inflation, etc. – and that’s provided other reasons to believe that stimulus is helpful because it helps to validate the Keynesian model.

    • Major_Freedom says:

      “These employment estimates come from prior multiplier estimates.”

      You mean empiricism was used to justify empiricism, so we can’t critique empiricism?

      The deep thoughts on this thread are palpable.

  7. Daniel Kuehn says:

    re: “This is why Austrians in the Misesian tradition think economists are fooling themselves when they try to copy the methods of the physicists.”

    Could you clarify what you mean by this? A lot of these methods were developed by economists. What methods are we copying from physicists?

    Even if some methods were comparable, why do you say “copy”?

    Wouldn’t you agree with me that methods should be judged by whether they’re appropriate to the problem, not by whether they are unique to a particular science or not.

    I’m really trying here – I just have no idea why a method being unique to a particular science matters at all.

    • Dan says:

      He’s not saying these approaches are wrong because they aren’t unique. That is an awfully strange way to interpret that sentence.

      • Daniel Kuehn says:

        Well let’s say there was wholesale “copying” (again – unlikely if you know what methods produce these estimates).

        Even then, who cares? We need a case for why it’s inappropriate. Why?

        • Dan says:

          Are you really unfamiliar with the Austrian position on this? http://mises.org/books/esam.pdf

          • Daniel Kuehn says:

            Of course I am aware of the Austrian position. But Bob didn’t put forward the Austrian position. He gave no reason to think the methods weren’t appropriate. If he wants to argue that he can, but he doesn’t.

            Look at what he DOES argue.

            - He talks about “copying” to give the impression that economists are somehow flailing around for something that makes them appear prestigious.

            - He comes out and says flatly that Samuelson was trying to “look” rigorous – again, giving an impression about economists’ inadequacy.

            - Finally he’s vague because if he gets into specifics it becomes obvious WHY economists use the tools they use and that it is justified.

            If he wants to make the Austrian case he’s free to. But he seems to be consciously avoiding making that case, I’m guessing because he knows better than most how flimsy it is.

            I’m fully familiar with the Austrian argument. If he’s not going to make it, exactly why should I make it for him.

            • guest says:

              If he wants to make the Austrian case he’s free to. But he seems to be consciously avoiding making that case …

              I think he’s consciously avoiding making that case because his point in dwelling on this stuff is to show the bankruptcy of the empirical approach to economics.

              And, in order to try to get someone who thinks this way to understand why it doesn’t work in economics the way it does in physics or chemistry, he thinks it is entirely worthwhile to show that Krugman et al. aren’t being nearly as “objective” as they think.

            • Major_Freedom says:

              “Of course I am aware of the Austrian position. But Bob didn’t put forward the Austrian position.”

              So Bob has to put forward the theoretical Austrian view EVERY SINGLE TIME he makes an argument?

              At what point will you realize Bob’s an Austrian?

          • Daniel Kuehn says:

            If he’s going to just put out innuendo like that I don’t feel in any way obligated to read between the lines.

            Let him make the case explicitly if he thinks it’s a defensible case.

            And let him get specific about which methods he thinks are appropriate and inappropriate. If he wants to play that game, let’s get specific. I’m sure there are some methods that are inappropriate, but let’s have that argument.

            Staying vague and staying in the territory of innuendo let’s him paint it all with the same brush, and even if I know the Austrian case, I’m not going to play that game.

            • Major_Freedom says:

              Murphy has already done this, DK.

              I believe you’re conflating not reading his works, or purposefully pretending to not be informed of them, with them not actually existing.

              You’ve been reading him for far too long for your posts here to be defensible.

    • Bob Murphy says:

      Daniel, I am saying historically, economics was a verbal deductive science. Mises didn’t think he was prescribing the a priori approach in the beginning of his career; he thought he was codifying what economists were actually doing.

      But particularly with Paul Samuelson, economists wanted to make their product look more “rigorous” and “scientific.” I am claiming they openly copied what they thought the physicists were doing. I can’t back up that claim right now, but I think it’s pretty uncontroversial. And in his famous methodological essay, Milton Friedman explicitly says economists should follow the “scientific method” that we all learn about in school.

      So, I’m saying that this approach doesn’t work very well in economics. I’m not saying, “Because we copied it from the physicists, it must be bad.” Rather, I’m saying, “This approach clearly doesn’t work in economics. Just because it works in physics–and we all agree that physics ‘works’ and that physicists are really smart guys–doesn’t mean we have to make our field look as much like theirs as possible.”

      • Martin says:

        I recall reading von Neumann refused to review Foundations of Economic Analysis because of the math used.

        “More recently John von Neumann refused to write a review for Samuelson’s Foundations of Economic Analysis in 1947 because “one would think the book about contemporary with Newton”, like many mathematicians who look at economics, von Neumann believed economics needed better maths than it was being offered [19, p 134].”

        http://magic-maths-money.blogspot.nl/2013/08/oedipus-and-difficult-relationship.html

        Samuelson’s own Nobel prize speech when it comes to your point.
        He even makes the very nuanced point after taking the listener/reader through some physics, that he is not making analogies between the substance of physics and the substance of economics, but rather between their formal methods.

        http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1970/samuelson-lecture.pdf

        To illustrate: “There is really nothing more pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics”

        (Honestly his writing style is superb and still very persuasive; foundations was also a joy to read.).

        • Bob Murphy says:

          Martin, right, I agree Samuelson was a joy to read; he’s way more formidable an adversary than Krugman. That’s why I was thrilled when he refereed my paper on capital theory. Did you see this?

          • Martin says:

            Yes. Also it’s a shame you do not have the originals anymore. Would’ve been fun to have had them framed. I don’t think that many people can claim that their dissertation was read, criticized and (positively) refereed by the Paul Samuelson.

            I don’t know what I was trying to write with the sentence after the second quote. It looks garbled. The meaning though seems clear.

      • Daniel Kuehn says:

        Did Samuelson want it to “look” more rigorous or to BE more rigorous?

        The former would be truly disappointing – but I don’t think it’s true and I don’t think you can really stand by that claim. You’ve seen Samuelson behind the scenes. You know his sincerity.

        If he is trying to BE more rigorous then just citing how it was done historically doesn’t quite make your case, does it?

        Samuelson did knowingly use math used in thermodynamics.

        That’s not the controversial point. The controversial point is whether the coincidence of the math is a problem.

        • Ken B says:

          Excellent point. Let’s make this a bit closer to home. Landsburg is a very mathematical economist. Is that to make his arguments better or to just make them look better? I doubt Bob would assert the latter.

      • Daniel Kuehn says:

        I guess if you don’t mind being unscientific you don’t need to worry about the scientific method.

        But then it seems like your title should be “we ought to be unscientific” and not “you guys are intellectually bankrupt”.

        Right?

        • Dan says:

          “I guess if you don’t mind being unscientific you don’t need to worry about the scientific method.”

          You’re smarter than that.

          • Daniel Kuehn says:

            What is being scientific if not applying the scientific method? It’s not appropriate to all things in life of course. But if you think that about economics then it seems like you should make that clear that that’s the issue at hand “I think economics ought to be unscientific and you think economics ought to be scientific and that is a mistake on your part”, instead of this name-calling stuff.

            • Dan says:

              ‘But if you think that about economics then it seems like you should make that clear that that’s the issue at hand “I think economics ought to be unscientific and you think economics ought to be scientific and that is a mistake on your part”’

              My God, you’re acting like a complete child on this matter. Passive aggressive much with your insults?

              • Daniel Kuehn says:

                Don’t talk to me like that – I’m trying to make points here because this issue is important to me. If your only response is to insult me then just don’t respond.

                What is passive aggressive about this?

                Bob is now at the point of questioning whether we should even use the scientific method (which is far beyond the claim about Samuelson and physics). If he genuinely thinks that is the problem, then we are in two entirely different universes and have two different views of what economics should be.

                And he should be upfront about that instead of calling other people “intellectually bankrupt”.

              • Bala says:

                “Bob is now at the point of questioning whether we should even use the scientific method ”

                No, Daniel. Bob is now at the point of questioning whether economics should use the empirical method at all, whether in theorising or in validation.

                You are the one making the claim that the empirical method is the sole method of science and that any other method, however appropriate to a field of inquiry, must be deemed unscientific if it rejects the empirical method, even if such rejection were the right thing to do.

              • Bala says:

                Sorry, Daniel.

                Bob is also at the point of questioning the very notion of labeling that which comes from use of the empirical method as economics. He would agree if you called it economic history, but not if you called it economics

                Bob, do correct me if I am wrong on this.

            • Major_Freedom says:

              “What is being scientific if not applying the scientific method?”

              You’re begging the question DK. :”Being scientific” does not necessarily mean you’re being positivistic.

              By claiming that positivism has a monopoly on science, you’re insinuating, probably on purpose, that any other field of inquiry is “unscientific.”

              Science is much broader than what was codified during the early 20th century.

            • Matt Tanous says:

              “What is being scientific if not applying the scientific method?”

              The search for knowledge regarding the world and its phenomena. There is no requirement that this be empirical, much less according to the “scientific method” (a method, by the way, that even most natural scientists don’t follow – at least not as learned in 5th grade….).

        • Bob Roddis says:

          Go ahead, be “scientific”. Do rigorous testing and prove that people don’t act purposefully, that they can read each others’ minds and that they do not rely upon the objective terms of others’ transactions in performing economic calculation. Do rigorous testing and prove that funny money loans do not distort the prices of houses, capital goods and everything else leading people to economically miscalculate.

          And while you are at it, scientifically find that elusive “market failure” that requires the Keynesian “cure”.

          I do repeat myself.

          • Daniel Kuehn says:

            Why would being scientific entail trying to prove that people don’t act purposively?

            WTF are you talking about?

            • Bob Roddis says:

              You know exactly what I’m talking about. Take each of the basic Austrian concepts, run your scientific tests and disprove them.

              • Lord Keynes says:

                “You know exactly what I’m talking about. Take each of the basic Austrian concepts”

                Like a market clearing price? Oh wait, you don’t understand what that is.

              • Bob Roddis says:

                Like a market clearing price? Oh wait, you don’t understand what that is.

                Liar.

              • Bob Roddis says:

                The key and essential phenomenon is economic calculation which Lord “Somewhere Out There” Keynes is compelled to misstate over and over.

                Go run your tests. Refute it.

            • guest says:

              Because once you’ve conceded that people act purposefully, you’ve conceded Austrian methodology:

              Tom Woods lecture on Praxeology
              [WWW]http://www.youtube.com/watch?v=1PRTFAXX5Us

              • Bob Roddis says:

                Salon does their part to spread Praxeology:

                When we experience scarcity of any kind, we also become absorbed by it. The mind orients automatically, powerfully, toward unfulfilled needs. For the hungry, that need is food. For the busy it might be a project that needs to be finished. For the cash-strapped it might be this month’s rent payment; for the lonely, a lack of companionship. Scarcity changes how we think. It imposes itself on our minds.

                http://www.salon.com/2013/09/08/scarcity_changes_how_we_think/?source=newsletter

                Tom Woods and Salon are crazy because I was just reading on the Mike Norman site that we can never run out of “dollars”.

            • Lord Keynes says:

              Like many ignorant Austrians he bizarrely thinks

              (1) his opponents reject the human action axiom , and

              (2) just because the action axiom is true, somehow — by deductive magic!!– the whole of praxeology has been vindicated.

              • Major_Freedom says:

                (1) The opponents reject the foundation of how we come to know the action axiom. That’s the point you’re ignoring.

                (2) Praxeology is just the study of human action. It is not a laundry list of claims.

            • Major_Freedom says:

              He’s saying that those things can’t be disproven empirically, DK.

        • Bob Murphy says:

          DK wrote:

          I guess if you don’t mind being unscientific you don’t need to worry about the scientific method.
          But then it seems like your title should be “we ought to be unscientific” and not “you guys are intellectually bankrupt”.
          Right?

          I have to be brief, so, No, wrong.

        • Bala says:

          Wrong. It goes like this.

          I guess if you don’t mind being scientistic you don’t need to worry about how silly it is to apply the empirical method to fields of inquiry for which it is not appropriate. You can continue believing that a sledgehammer is the most appropriate tool to create a masterpiece that rivals the best that da Vinci could come up with.

          • Daniel Kuehn says:

            If you don’t think this field of inquiry is appropriate for using the empirical method/the scientific method, then come out and say you think economics should be unscientific. Don’t make bad analogies.

            Here’s the thing, Bala – EVERYONE agrees economics should not just mimic physics. EVERYONE agrees that a sledgehammer is not an appropriate artist tool.

            If you think this then make a claim that we can actually talk about, and about which there is disagreement.

            Or if you can’t defend the claim that economics should not use the scientific method, then don’t claim it (that’s my preference obviously).

            • Bala says:

              The key, Daniel, is your implicit assertion that the empirical method is the sole method of science. That is the essence of my point.

              As I understand it, science is about knowledge and the scientific method is about the proper way to know. So, if you wish to assert that the empirical method is the sole way to know and that deductive reasoning, even the kind that is based on axiomatic premises, does not help us know anything at all about the real world, just say it straight.

              Equally fundamental is the point that empirical findings cannot refute propositions identified through deductive reasoning. It can only question the premises. That would bring us to Bob Roddis’ point above, but I’ll leave that to him. My point is that the empirical method has no role to play even in validating economic theories.

              As you rightly said in your opening post on this thread

              “Wouldn’t you agree with me that methods should be judged by whether they’re appropriate to the problem”

              What are we supposed to do then given that the empirical method is unsuitable to the study of economics, either in theorising or in validation? Just label it unscientific because it rejects the empirical method? Isn’t this the sum and substance of your claim?

              That’s why you make no sense to me.

            • Major_Freedom says:

              “If you don’t think this field of inquiry is appropriate for using the empirical method/the scientific method, then come out and say you think economics should be unscientific.”

              Science is not monopolized by positivism.

              It’s that simple.

              You can continue to attempt to monopolize science that way, but you will always fail, because positivism is but one method under the umbrella of scientific inquiry.

        • Tel says:

          Well at least some economists will honestly admit what they are doing is not science. That’s one better than pulling the wool over the punters.

      • Lord Keynes says:

        “Daniel, I am saying historically, economics was a verbal deductive science.”

        I guess the whole German Historical School where it was thought that economics was an “inductive science” just went out the window.

        Also, that school was dominant in Germany until the 1920s and its offspring — American Institutionalism — in the US influential there for a long time.

        Also, mainstream neoclassical economics is still deeply based on the deductivist method.

        • Major_Freedom says:

          “I guess the whole German Historical School where it was thought that economics was an “inductive science” just went out the window.”

          The German Historical School was a reactionary movement to rationalism, the latter of which has as one implication economics being a verbal deductive science.

          Murphy isn’t saying that all throughout history economics was all about verbal deductive inquiry until say the 20th century. He is saying that during some period in history, economics was dominated by the verbal deductive approach.

      • Ken B says:

        My complaint Bob, is that you deny it “works” in *biology*.

  8. Prateek says:

    Hey Bob, Glad you took some of ours advice and decided to use models. Thats a wonderful first step, and show you as a vanguard in Austrian economics, if not anything else. Now the problem comes how to make those models ( I can see you going through hayek and problem of economic calucation). Well firstly you should use the Milton Friedman way of making a model i.e “But the unrealism of a theory’s assumptions should not matter; what matters are the predictions made by the theory. A truly realistic economic theory would have to incorporate so many aspects of humanity that it would be impractical or impossible to do so. Hence, we must make simplifications, and cross check the models against the evidence to see if we are close enough to the truth. The internal details of the models, as long as they are consistent, are of little importance.’ But obviously this is not enough for you as an Austrian, and thankfully a lot of work has been done by a chicago school economist, who used a very Austrian concept, and we call it the Lucas Critique.”"Given that the structure of an econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models+ that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.” Bingo. Right now the mainstream school for model making is Chicago and new keynesian , as a Austrian modelmaker you will have to just incorporate the lucas critique in every model, and show through a model, that how the present model using certain constants, will demolish itself over a period of time. Hence the last man standing is capital theory . Great first step and congrats, prepare yourself for a great economic adventure.

    • Prateek says:

      Am I making a valid point?

    • guest says:

      A truly realistic economic theory would have to incorporate so many aspects of humanity that it would be impractical or impossible to do so. Hence, we must make simplifications, and cross check the models against the evidence to see if we are close enough to the truth.

      How will you know if the evidence you cross check the models against represents an economy with malinvestments or not?

      You data could be close to the models and still not catch a pending crash.

      And it’s not just that you’d have to incorporate aspects of “humanity”; You’d have to incorporate aspects of EACH individual human.

      You can not mathematically model free will:

      Calculation and Socialism | Joseph T. Salerno
      [WWW]http://www.youtube.com/watch?v=KseRuyAjlHY#t=54m53s

      • Bob Roddis says:

        You can not mathematically model free will

        And the Keynesians know this in their hearts, if not in their heads. They don’t run tests to disprove that free market prices provide essential information that is distorted by Keynesian policy. They avoid the subject altogether.

      • Prateek says:

        Hence the model evolves when you take in the crash and find time variance in factors which become important, not very differant from hayekian triangles.

        • guest says:

          Evolves toward what? Do you have an end goal?

          If you hope to stop economic crashes through central planning, you’re missing the point. Central planning is the CAUSE of crashes.

          Your models can’t tell you that because you think of economics in terms of aggregates rather than in terms of the individual.

          All economic activity begins and ends with the individual:

          The Birth of the Austrian School | Josep T. Salerno
          [WWW]http://www.youtube.com/watch?v=dZRZKX5zAD4

          • Prateek says:

            No not central planning, but whether purpose can be shown through models instead of rationality, and how distortions in price signals causes crashes

  9. Prateek says:

    P.S – Please try to correspond with Raghuram Rajan, Who is an First rate neo- Austrian not fully come out of the closet yet.

  10. Daniil Gorbatenko says:

    I’d add what I wrote on the blog of Daniel Kuehn.

    The problem is that the statistical methods economists use (Daniel is right that it weren’t physicists who invented them) aren’t very scientific. First of all, statistical inference is in general, strictly speaking, not scientific. No one knows what probability is at the bottom level and it is not an intrinsic, fundamental thing like energy (except, perhaps, for the collapse of the quantum wave function).

    At the practical level, probability is now defined as a share of a certain outcome of the experiment in all the observed multiple outcomes of such experiment. Even if we ignore the previous point and treat this approach as scientific there is a big problem for applying the method to economic phenomena. The problem is that choices aren’t repeated, separate experiments, they are unique events.

    I know that statisticians have found a way to go around this problem by showing that certain metrics of distributions of non-experimental data-generating processes are very similar to those of the distributions of outcomes of what they believe are repeated random experiments (like throwing dice). But this go-around is a non-sequitur. It requires a question begging assumption that probability is applicable where certain metrics of the distribution are similar to those of the distributions that are believed to be random.

    On the other hand, I disagree with Bob to the extent that he maintains that praxeology isn’t empirical. It isn’t empirical in the narrow, positivist sense of the word. But it is empirical in the Aristotelian realist sense of the word. All our knowledge is ultimately based on experience, including the knowledge of what action, means, money, etc. are..

  11. Tel says:

    I think empiricism makes sense when studying small business, or even household budget management… because there are sufficiently large numbers of almost independent samples that you can come up with a statistical approach that is not exactly textbook control-experiment empiricism, but you are at least hitting in the right park.

    It is difficult to easily compare the economy of the USA since 1900 against another similar economy in the same period. The statistical spread doesn’t work as well with big nations.

  12. Matt D. says:

    Questions of methodology aside …

    Let’s presume our theory is “all x are y” or if you prefer “if x then y”.

    So long as there are examples of x, then the theory is telling us something about x. Therefore the theory has empirical content. As such it can in principle be tested.

    The theory “all imps are red” is logically compatible with “all imps are blue” precisely because there are no imps. Neither statement has empirical content, so one cannot contradict the other. If this sounds strange, then read up on “material implication” in logic:
    http://en.wikipedia.org/wiki/Material_implication_(rule_of_inference)

    Also study the difference between contraries and contradictories:
    http://www.randyeverist.com/2011/02/difference-between-contraries-and.html

    Let’s take an example, “all swans are white.” If there are swans, then this theory is empirical. It restricts the way that swans exist. In other words, it says if there is a swan, it must be white.

    Also note how easy it is to save the theory in the presence of counter evidence. Say someone observes a black swan. That sighting is not compatible with the theory. It clearly contradicts it.

    No problem, we can just add a new theory, “that swan that looks black is really white, but dirty.” Easy enough, theory saved.

    Or we can try a different maneuver, “What? You calling that a swan? If it’s not white, then it can’t be a swan!”

    We never need be wrong!

    It’s very easy to save *any* theory. Of course, with some theories this is harder to do, precisely because the manipulation becomes more and more apparent as we try to *save* our theory. The empirical content grows weaker and weaker until it is nothing but a barely edible gruel. A good scientists in the face of counter evidence doesn’t try to save their theory! They want their theories to be falsifiable.

    However, with some theories, because of the incredibly complexity, we can act to save our theories quite surreptitiously, without anyone catching us. That is the problem. This doesn’t even have to imply dishonesty, because human nature is what it is … it’s not hard to fool ourselves we are always right.

    My main point? It would be wrong to say economic theories are not empirical. That would be tantamount to saying they don’t have an import in the world. Clearly they do … either they say something about the world, or they do not. Either they restrict the way swans are – or they restrict nothing at all.

    I highly recommend F. A. Hayek’s _Studies in Philosophy, Politics, and Economics_. The first two essays of that book discuss this issue in detail. Hayek in a sense is trying to reconcile his Austrian leanings with what he learned from science from his great friend Karl Popper. Those two essays are a tour de force and not to be missed.

  13. Bob Roddis says:

    Just to be clear on my questions above. The anti-Austrians constantly attack our methodology but ignore and do not engage our basic concepts and analysis.

    So, in a (probably) vain attempt to shame them into engaging our concepts and analysis, I’m requesting that they adopt their favorite methodology and use it to refute those basic Austrian concepts and analysis that they otherwise ignore and pretend do not exist.

    It is a waste of time fighting with them for decades about their claims that we are using a wrong methodology regarding concepts they do not and refuse to understand.

    • Lord Keynes says:

      ” The anti-Austrians constantly attack our methodology”

      What methodology? By your endless quoting of Rothbard disagreeing with Mises on synthetic a priori knowledge, you’ve already admitted there is more than one “method”.

      And that is before we get to Hayek’s utter rejection of Mises’s apriorism:

      “I had never accepted Mises’ a priorism …. Certainly 1936 was the time when I first saw my distinctive approach in full clarity – but at the time I felt it that I was merely at last able to say clearly what I had always believed – and to explain gently to Mises why I could not ACCEPT HIS A PRIORISM”

      • Bob Roddis says:

        Again, you note a dispute about HOW TO DESCRIBE AND/OR CATEGORIZE what we claim to be the obvious truth which is distinct from the obvious truth itself. I’m challenging the Keynesians and non-Austrians to engage and refute these claims/concepts/analyses employing their favorite methodology.

        Lord “Somewhere Out There” Keynes still doesn’t understand economic calculation, so he still isn’t up to the task of refuting it.

        • Lord Keynes says:

          “Again, you note a dispute about HOW TO DESCRIBE AND/OR CATEGORIZE what we claim to be the obvious truth which is distinct from the obvious truth itself.”

          Wow. You’re saying methodological disputes about epistemology aren’t methodological disputes?

          Roddis wins the prize for logic 101, or lack therefore.

          • Major_Freedom says:

            “You’re saying methodological disputes about epistemology aren’t methodological disputes?”

            No, he’s saying disputes in how to describe the truth, how to categorize them logically, is separate from the truth itself.

            • Lord Keynes says:

              Which is just a straw man, since I never implied or stated that it was.

              • Major_Freedom says:

                He never ascribed that argument to you.

                Not all arguments are about you LK, as much as you wish otherwise.

                He was noting a dispute.

      • Major_Freedom says:

        What methodology? By your endless quoting of Rothbard disagreeing with Mises on synthetic a priori knowledge, you’ve already admitted there is more than one “method”.

        “There is nothing wrong with the positive ideas of either Rothbard or Younkins on the action axiom, and their attempts to ground it in a firm, realistic metaphysical-epistemological framework can only be applauded. I will show that their project faces even less opposition than they think—since a Misesian-Hoppeian view of the action axiom fundamentally agrees with theirs.”

        https://mises.org/journals/qjae/pdf/qjae10_2_4.pdf

        • Lord Keynes says:

          A quote which does not refute the view that more than one method exists in the more Austrain school.

          • Major_Freedom says:

            Read the entire paper LK.

            I did not intend for that one quote to serve as an entire argument against the notion that more than one method exists. One quote would not be able to do it justice. I posted that one quote as a summary of what the paper is about.

            At any rate, the paper makes a very strong case that not even Rothbard’s own quotes entail proof that “more than one method” exists in the Austrian School.

            Also, if we are to understand you as a consistent empiricist, your arguments cannot be treated as proof that more than one method exists in the Austrian School.

            To be a consistent empiricist, you’d have to be willing to admit that your theory that there is more than one method to be itself subject to future falsification through experience. That your current opinion on the matter is but a hypothesis.

            • Major_Freedom says:

              In other words, empiricism does not allow you to conclude that anything has been “proven” or “disproven” apodictically.

              By telling me “More than one method exists in the Austrian School” you are not making a strictly empirical statement.

  14. Yancey Ward says:

    A lot has been made recently about the trend of younger adults moving back in with their parents, living in the basement, and leading a life of less work and more leisure. A lot (most, if not all, I would argue) of macro-economists look at this trend and see policy failures- a Keynesian might say it is a lack of aggregate demand by the rest of society, and, perhaps, an Austrian will look at it and say it is due to structural impediments that hinder these people from working more and working more productively. Both camps basically make the claim that, at the moment, you have X% YOY increase in GDP, but if you follow their policies, you can get Z% YOY increase in GDP where Z>X. However, I have to question the validity of simply asserting that you should want Z% rather than X% YOY GDP growth. And let me illustrate what I am trying to describe with a simple two-person economy:

    Let’s say you have Robinson Crusoe and Friday on an island. At the start, their total GDP is all the fish and fruit they can gather. Let’s say that Robinson is content to spend 3 hours a day fishing and gathering, and the rest of the time sleeping and doing other various activities. However, Friday is a more ambitious sort, and he attempts to convince Robinson to help him in various ways to improve their productivity so that, in the future, Robinson can spend 2 hours a day fishing and gathering (or, equivalently, 3 hours but more/better fish and fruit), but at the cost of investing some of his sleeping and leisure hours today working with Friday to attain these improvements. However, Robinson makes the counter argument that even if Friday’s plans pan out, the additional leisure time or food it would gain Robinson just don’t matter to him, and he refuses to work with Friday. As a good macro-economist, how should Friday describe his colleague’s refusal to aid in the island economy’s growth? What should he do about it?

    • Bob Roddis says:

      Any failure on the part of the public to buy finished goods might be described as a “lack of aggregate demand”. The Keynesian Hoax is based upon ignoring and suppressing the obvious fact that the price, investment and capital structures are artificially distorted by prior Keynesian policies or artificial credit expansions and need to be re-established on a real (non-stimulated) basis. The Hoax is also based upon ignoring the source of their proposed increased aggregate demand, which is purchasing power stolen from others. The Hoax is also based upon an alleged prior non-existent market failure. Finally, (and I may be omitting some points), the Hoax is based upon claiming that the collection of the unsustainable prices and transactions occurring during the artificial boom is a “trend line” that must be and can be replicated with government spending on digging holes as the equivalent of prior spending on scientific research. Empiricism cannot cure these problems and this is why Keynesians never try to refute these challenges with empirical evidence. This Keynesian critique of Austrian methodology is nothing more than their usual subject-changing.

    • Bob Roddis says:

      A few years ago, DK wrote:

      I agree whole-heartedly with the point that the area where the Austrians could make the greatest inroads is by taking up empirical work. Notice what guys like Krugman (sorry, he’s the best example despite his lack of currency in your community) say when they dismiss what he calls “liquidationism”. He gets the theory wrong, of course – but he doesn’t say readjustment doesn’t make sense as a concept (what economist would?) he says he doesn’t see it in the data. When I discount regime uncertainty arguments which have been virtually adopted as a part of the Austrian school, I don’t say that it doesn’t make sense. In fact I claim it makes a lot of sense and it is certainly one factor. I just say it doesn’t seem to show up as a primary element in the data. Some Austrian arguments are a little unfamiliar to people, but the critique usually isn’t that they’re crazy or wrong-headed. It’s that they’re interesting and plausible but don’t seem to be a major feature of what we see.

      Which begs the question – is that true or not? It’s not like people have been doing rigorous empirical tests on behalf of the Austrians or anything. Usually the “I don’t see it in the data” claims are just eye-balling the data sort of statements. So there’s a lot of potential work to be done here.

      http://factsandotherstubbornthings.blogspot.com/2010/09/thoughts-on-empirical-austrian.html

      What data is there that refutes the Austrian claim that during the housing boom fiat money loans artificially bid up the prices of houses and most everything else, made everyone feel richer than they actually were and that the ensuing boom was unsustainable and headed for a crash and a painful re-pricing process?

  15. thinkingotherthings says:

    Bala (foregive me for jumping in on your conversation with Daniel),

    I don’t think Daniel or any economist thinks that “the empirical method is the sole way to know and that deductive reasoning, even the kind that is based on axiomatic premises, does not help us know anything at all about the real world” (bold added). Rather, what I – and I’m fairly sure most other economists – hold is that deductive reasoning alone cannot answer *all* economic questions.

    “Equally fundamental is the point that empirical findings cannot refute propositions identified through deductive reasoning.”

    Suppose you have logically deduced that an increase in X causes an increase in Y. Because this conclusion was logically deduced from the premise, you are entirely confident in its correctness. But what if there was another channel you had overlooked? What if an increase in X, in addition to directly increasing Y, also caused an increase in Z, and Z in turn caused a decrease in Y? In that case, the net effect of X on Y is not so clear.

    This is where the value of empirical methods lie. Macroeconomic theories must account for many moving parts. Insofar as we are not 100% confident that our chain of logical reasoning has accounted for every endogenous effect, testing theories against reality sheds light on whether a theory has in fact ignored such Z factors. And to the extent that we become aware of these Z factors, the data can help tell us which effect (X or Z) has a greater impact on Y.

    Data can never prove or disprove any economic theory definitively, but the higher the probability that we would observe the data conditional on a theory being correct, the more confidence we can have in the veracity of that theory. The corollary holds as well.

    • Bala says:

      “I don’t think Daniel or any economist thinks….”

      Wrong. Daniel clearly thinks and states that if a study rejects the empirical method in theorising or in validation, it is unscientific. If science is about knowledge and the scientific method is about the proper way to know, you are clearly failing or refusing to face the obvious implications of Daniel’s statement.

      “Suppose you have logically deduced that…..”

      Sounds like you are restating the ceteris paribus clause in a more elaborate manner.

      “This is where the value of empirical methods lie.”

      I don’t know if you have read Hayek’s Monetary Theory and The Trade Cycle but he explains this point in that book. It is not that empirical methods are of no value in economics. It is that they have no legitimate role in economic theorising and validation of economic theories.

      “the more confidence we can have in the veracity of that theory”

      The confidence in the truth of a logical corollary of an axiomatic premise comes solely from the soundness of the reasoning and the axiomatic nature of the premise. Data has no role to play.

      • thinkingotherthings says:

        Wrong. Daniel clearly thinks and states that if a study rejects the empirical method in theorising or in validation, it is unscientific. If science is about knowledge and the scientific method is about the proper way to know, you are clearly failing or refusing to face the obvious implications of Daniel’s statement.

        This aspect of your dispute seems to be about the definition of “scientific” knowledge rather than whether logical deduction contributes to knowledge. Daniel is using scientific to mean knowledge derived from application of the scientific method. That does not mean that ALL knowledge must be derived from science. For instance, pure mathematics is not scientific in that sense either, but that doesn’t mean it can’t help tell us anything about the world.

        Sounds like you are restating the ceteris paribus clause in a more elaborate manner.

        But the ceteris paribus assumption is not always harmless. It is fine when the factors held constant are not endogenous to the theory – i.e., we can state the law of demand holding preferences, weather, and other shocks constant because none of those are directly influenced by prices.

        But invoking ceteris paribus requires much more care when you are looking at more complex theories. For instance, it would be misguided to ask what happens to consumption spending when interest rates fall while holding investment spending constant. The problem, of course, is that a fall in interest rates has a direct impact on investment spending as well, so it cannot rightfully be excluded from the theory. And even if you can logically deduce a causal chain from interest rates to consumption spending, it will be flawed if it fails to account for the impact of a change in investment spending that is also a function of interest rates.

        The confidence in the truth of a logical corollary of an axiomatic premise comes solely from the soundness of the reasoning and the axiomatic nature of the premise.

        But you can soundly deduce that X causes Y without realizing that you have failed to account for the effect of X on Z, which in turn effects Y. In the real economy there are millions of these Z factors that cannot be dismissed with the invocation of ceteris paribus because they are not orthogonal shocks, but are direct consequences of changes to other variables that influence the variables your theory does try to explain. To be 100% confidence that your theory accounts for all causal chains is, in my opinion, a mark of hubris.

  16. Ken B says:

    Here’s a question. If economics isn’t about empirics, is it at least about consequences?

    Because then I have a follow up. If it’s about consequences, then isn’t it kinda lazy intellectually to give up on trying to winkle out some testable ones? Surely there must sometimes be a way to see the alternative consequences eventuating.

    • Bala says:

      The short answer is, no. The logical inferences derived through deductive reasoning from the action axiom are not testable. Let me therefore ask you a counter question – What do you want to test given that economic laws are not testable?

  17. MichaelC says:

    Perhaps Russ Roberts saw this post from Liberty Australia (https://www.facebook.com/LibertyAustralia/posts/10151582978311681), regarding “Dr. Leithner [who] will be addressing “The Bankruptcy of Mainstream Economics” at the 3rd Annual Mises Seminar: http://mises.org.au/ Tickets on sale now.” (1st September). Featuring Jeffrey Tucker as special international guest speaker. Perhaps not. For those interested 30 Nov-1 Dec, Brisbane :) .

    In any case, I thought this was somewhat applicable:

    “But he who lives by prediction is destined to die by prediction. In addition to these failures of Keynesianism and monetarism, the blunders and errors of econometric forecasting have become too notorious to ignore, and a wealthy and supremely arrogant profession, using ever higher-speed computer models, seems to enjoy less and less ability to forecast even the immediate future.

    Even governments, despite the assiduous attention and aid of top neoclassical economists and forecasters, seem to have great difficulties in forecasting their own spending, much less their own incomes, let alone the incomes or spending of anyone else.”
    — MNR, The Hermeneutical Invasion (http://mises.org/story/2337).

  18. innocent says:

    Actually I think that economics is scientific, but due to macro economic size and myriad of variable and longevity of policy choices it simply takes a long time for choices made to show as a poor choice. For example fed intervention, is it making things more or less stable? The theory I have is that it makes thing less stable over time, but the time scale to really see this will be over the course of two centuries and mired against hundreds of bad policies coming out of the government over the same period. Ultimately what should emerge are more frequent boom and busts. But this will be over a long time of continued observations and there would be these cycles as well due to for banking. Oh well, economics is all vodoo and those like Krugman that make statements that are always right because they are couched in policy double speak will always seem to win.

  19. Mark says:

    Wait a sec – did you really just use the fact that monthly job growth was accelerating from 2009-2012, aka the further back you go for an average monthly growth the lower it gets, as a justification for dismissing the clear evidence that job growth since sequestration is demonstrably and significantly lower than it was in the recent months before sequestration?

    what a bizarre twist of logic you just used in order to avoid admitting you were wrong.

    • Tel says:

      Surely if you get to cherry pick a convenient starting point that suits the answer you want to get, so out of fairness everyone else does as well.

      Unless you have some justification for picking one point over another, which I notice you don’t provide anywhere.

  20. Diomides Mavroyiannis says:

    I think its abit unreasonable to expect precise projections. I think the way economic science works has more to do with, statements like: “If this happens, and these assumptions are met, and this and that are present, then this will follow.” Some assumptions would include on the level of stickiness and which prices are sticky to which extent, how how the labor force behaves(including some behavioural assumptions), perhaps assume foreign events unfolding in a specific way… but assuming that any economist can make accurate forecasts is probably wrong. Its just that under the current framework the number of variables that would change the forecast are too many to list out thoroughly. So I don’t see much value in these projections but I still want them to be there because it will gradually help improve the forecasting process.

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    [...] heavens!–on more solid footing than any Keynesian forecaster realized, back when they warned how awful sequestration would be. No Responses to “But the Progressives Told Us Abenomics Would [...]

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